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Entrepreneurs - Gamblers or Risk Managers?
Randall Goldsmith Dr. H. Randall Goldsmith
President and CEO - San Antonio Technology Accelerator Initiative
San Antonio, TX

The cigar smoke in the bar room is thick. A banker, three ranchers, and a gambler have been at the card table for hours. The poker pot has grown big, even by Wild West standards. All but the gambler and one of the ranchers have thrown in their cards. Sure of victory, the rancher bets all his cash and his ten thousand acre ranch to call what he is sure is the gambler's bluff. When the cards are exposed, the rancher is mortified to discover that the gambler's four sixes beat his full house. … And the gambler suddenly finds himself in the cattle business.

Stories like these, some fact and some fiction, have been celebrated throughout history, but most successful entrepreneurs do not take wild, uncalculated risks in starting a company.

The National Commission on Entrepreneurship has identified Five Myths About Entrepreneurs: Understanding How Businesses Start and Grow. First is the "Risk Myth: Most successful entrepreneurs take wild, uncalculated risks in starting a company." In fact, the risk associated with a start-up is relatively low in the beginning. Successful business ventures are usually born out of an idea of how to solve a market problem or meet a market need through a profitable innovation that offers sufficient benefits to cause customers to choose the product or service.

Ideas are free. Most of the time and effort used to explore the application of an idea or a concept is considered opportunity cost. It is not until real feasibility analysis begins that the concept begins to take on value. Here three primary questions about technical, market, and venture validation must be addressed: can the product or service be produced and delivered economically; does the product or service offer a market solution at an attractive price to a target market of sufficient size to generate a profit; and are the proposed business and financial models appropriate for the current market environment and investor appetites? Even at this point, the entrepreneur's "opportunity risk" (the time and resources expended investigating this opportunity in lieu of pursuing some other effort) is minimal, but the potential venture has increased its intangible value as a result of market intelligence completed and knowledge gained during the process.

In the grand scheme of developing the venture, the entrepreneur's personal investment takes on a new level of risk when personal finances and the finances of friends and family are invested. This is typically referred to as the "start-up" phase -- the entrepreneur is developing a prototype of the product or service, making direct contact with potential customers, and launching minimal business operations. Traditionally the cost for this level of activity is roughly $100,000 and, ideally, is accomplished in fewer than six months. This "personal risk" is often loaded with emotional and social implications that increase the risk burden. Business failure at this stage could mean financial hardship and the disruption of personal relationships.

Additional risk is assumed in the next development phase - market introduction. This involves introducing to the market both the product and the actual business entity. Customers, suppliers, distributors, and investors base their decision to do business with the entrepreneur not only on the value of the product, but also on the reliability and sustainability of the business entity. In the market introduction phase the entrepreneur is assuming "credibility risk," where the market allows few delivery failures. Any breakdowns in supply, quality, payment, advertising, and other business issues rarely receive a reprieve from a market that has multiple solution providers.

Another risk the venture assumes in the market introduction phase is "investor risk." Often outside, early-stage investors are needed to support the development of the product, establish market channels, support sales, and create revenues for business operations before the company achieves positive cash flow. The entrepreneur must carefully determine the characteristics of the right investor, the appropriate amount of capital, the value of the venture, and the terms under which this relationship will exist. Once the entrepreneur accepts outside investment capital, accountability increases and personal control is diluted. At this point the entrepreneur adds to the risk burden another intangible factor -- "control risk."

Once the venture has reached the "later stages" of development and is gaining market share, growing sales and making a profit, it assumes "value risk." At this point the value of the venture exceeds the amount of the original investments. Failure of the venture at this point means not only losing the original investment and the unrealized gains, but also placing a negative financial impact on suppliers and distributors and on those employees who lose their jobs.

The bottom line is that entrepreneurs are risk manager but rarely gamblers. They are almost always fiscally prudent, knowledgeable of the market, discerning in judgment, deliberate yet decisive in action, and realistic in calculating risk.

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